Sunday, September 23, 2007


Recent interest rate cuts by the FED and a periodic trade-balance deficit in the U.S. have pushed the strength of Canadian dollar ahead of the U.S. dollar. In February 2002, the CAD hit the all-time low of 62 U.S. cent. Two days ago, the Canadian dollar climbed up to 1,0004 USD.

The relative strength of CAD is fueled by weak U.S. currency and high prices of major Canadian commodities, including oil, gold and wheat, reflecting trade conditions in the world market. An additional push-up of CAD has been powered by continuously optimistic and record-high wholesales data and estimates. Unlike the U.S., Canadian economy maintains a strong budget and current-account surpluses which boosts the position of the Canadian currency in relative terms.

Not surprisingly, Bank of Canada has not yet estimated a possible interest rate cut over the short-run in its policy forecast, unlike the FED's recent benchmark rate cut. As a result, the investors have not predicted such forward-looking expectations an advantageous gain from a favorable yield of higher Canadian interest rates.

On the other hand, the data revealed that Canadian manufacturing sector struggles to maintain profit margin to sustain the competitive edge in the world market. Consequently, dividends have shrank.

Could the opportunity of the strong currency have an impact on labor market and manufacturing sector? Definitely. Strong position of the Canadian currency could reverse the trend of productivity dynamics. Through imported technology, the labor productivity per unit could spark-up and thus the side-effect of productivity growth would have had a greater strength to stimulate the performance of the labor supply. However, the medium-term scenario will depend on the ability of the manufacturing sector to increase sales partly depending on the dynamics of the Canadian currency relative to other currencies. The economic indicators also show strong effective investment activity of the Canadian economy due to recent spark in sold options which is why Canadian banking sector is temporarily soaring.

Of course, oil price benefits sustained at a stronger parity do not neccesarily reflect the permanent robustness of the economy due to periodic fluctuations and changing demand/supply conditions in the world market.

Read also:
Oil puts Canada's currency ahead of the U.S. dollar, Financial Times, September 21, 2007 (link)

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